Whether to rent or to buy the place in which you live is a major decision. It doesn’t just affect how much money you have left at the end of the month; it also affects your lifestyle and the size of the savings you accumulate over the years. Every day, people buy homes when financially they’d be better off renting, because it’s important to them to have a place to put down roots and because they see owning a home as an investment that can grow and as a source of tax deductions. Similarly, people rent all the time for the flexibility and minimal responsibility it offers, even though they’d amass a larger net worth over time if they bought a place.
Of the two options, the bias often veers towards ownership: It's a big business for everyone from mortgage lenders to real estate agents to home improvement stores, so we are bombarded with the message that being a homeowner is the key to happiness and part of the American dream. But owning isn’t universally better than renting, nor is renting always simpler than owning. Consider the pros and cons of each to figure out whether renting or owning is best for you.
Stability vs. Flexibility
Home ownership brings intangible benefits such as a sense of stability, belonging to a community and pride of ownership. However, it’s not good for restless or nomadic types. Real estate is the original illiquid asset. You might not be able to sell when you want if the housing market is down, and even if it’s up, there are significant transaction costs when you sell. Changing your mind about where you want to live is far more expensive when you own.
Renting means you can move without penalty each time your lease ends, but it also means you could have to move suddenly if your landlord decides to sell the property, turn your apartment complex into condos or bump up the rent by more than you can afford. (To deal with such issues, see Easy Ways To Cut Rental Costs.)
The biggest myth about renting is that you’re "throwing away money" every month. Not so. First of all, you need a place to live, and that always costs money, in one way or another. Second, while it’s true that you aren’t building equity with monthly rent payments, you also aren’t building equity with much of the money you’ll put into owning a house. The overall cost of home ownership tends to be higher than the overall cost of renting, even if the monthly mortgage payment is similar to (or lower than) the monthly cost to rent.
Here are some expenses you’ll be “throwing away money” on as a homeowner that you don’t have to pay as a renter:
Perhaps the biggest throw-away expense is mortgage interest, which can make up nearly all of your monthly payment in the early years of a long-term mortgage.Take this typical scenario: You borrow $100,000 at 4% for 30 years. Your first monthly payment will be $477.42, of which $333.33 is interest and $144.08 is principal. It will be about 13 years before more of your monthly payment goes toward principal than toward interest, and in total, you’ll lose $71,869.51 in interest (though, admittedly, you'll recoup some of that in tax deductions). (Learn more in How To Buy Your First Home: A Step By Step Tutorial.)
Even renovation projects don’t often increase the value of your home by more than what you spend on them. On average, you’ll get back 64 cents for every dollar you shell out on a home improvement project, according to Remodeling magazine’s 2017 Cost vs. Value Report. The projects that recoup the most are not glamorous things you’ll be excited about doing, either: The best return (and the only one on Remodeling's list that returns a higher value than its cost) comes from putting loose-fill insulation in an attic. Then there's replacing your front door with a new, steel entry door, on which you’ll almost about break even.
Once you add up all these costs, you might find that you’re better off financially by renting and investing the other money you would have put into a home into a retirement account. (For more on planning for your future, read Top Rules of Thumb for Retirement Savings.)
When you rent, you know exactly how much you’re going to spend on housing each month. When you own, you might pay nothing more than your mortgage and regular bills one month, and an additional $12,000 on a new roof the next (which homeowners' insurance may or may not cover). But you’ll never have to pay to replace your roof when you rent. Your monthly, home-related expenses, such as renter's insurance, tend to be more predictable. (See 6 Good Reasons To Get Renter's Insurance).
As a renter, though, you do face unpredictable rent increases each time your lease is up for renewal, unless you live in a city with rent control and your apartment is covered by it. If you live in a desirable part of town, rent increases can be steep, while if you get a fixed-rate mortgage, your monthly house payments will never increase (though property taxes and insurance premiums probably will). Learn more on the former in Your Property Tax Assessment: What Does It Mean?)
Other Ownership Myths
While home ownership is often touted as a way to build wealth, your home can lose value. Lots of value. The acceptable neighborhood you moved in could decline. A major employer can leave the area, causing a significant population decline and a surplus of housing, or there could be a residential construction boom – either of which keep prices down. You might buy a house for $200,000 tomorrow and in 30 years find that it’s still worth $200,000, meaning you’ve lost money after inflation.
Another bit of misleading conventional wisdom: Get a mortgage to get the tax deduction. True, the home mortgage interest deduction reduces your out-of-pocket expenses for mortgage interest early in your loan term (and the property tax deduction reduces property taxes), as long as you’re itemizing. But tax deductions are not a reason to buy a house. Here’s why: For every $1 you spend in interest, you might save 25¢ on your tax bill. You’re not coming out ahead. What’s more, as you pay down your mortgage and the proportion of your payment that covers interest decreases, so will the tax break.
Of course, renters get no mortgage tax deduction at all. But they can take the standard deduction that's available to all taxpayers.
Do you like having your evenings and weekends to use as you please? Do you work long hours or travel frequently? If so, the time commitment that comes with home ownership might be more than you want to take on. There are always projects around the house that you will need or want to take care of, from finding a plumber to replace a rusted out pipe to repainting the bedroom to mowing the lawn. If you live in a community with a homeowners association, the HOA might take many of these home ownership chores off your plate for an additional cost of a few hundred dollars a month. But beware the headaches that association membership can entail. (Learn more in 9 Things You Need to Know About Homeowners Associations.)
If you rent, your landlord will take care of all the repairs and maintenance – though of course they may not be done as quickly or as well as you would like.
The Bottom Line
Which option is best for you isn’t just about money; it’s also about comfort and your vision for your life. Ignore people who tell you that owning always makes more sense in the long run, that renting is throwing away money, or that it makes more sense to buy if your monthly mortgage payment would be the same or less than your monthly rent payment. Housing markets and life circumstances are too varied to make blanket statements like these.
Still, despite the added expense and extra chores associated with owning a home, many people chose it over renting: It provides a more permanent place to raise children in. Or it offers the only way to have, or create, the sort of residence they want.
Ultimately, the decision to rent or to own is not just financial – it’s also emotional.
A requirement shared by most peoples, and across most cultures, is the need for a place to live, not merely a â€˜houseâ€™ (which refers to the physical construction) but also a place where a family feels a sense of â€˜belongingâ€™, i.e. a â€˜homeâ€™. Although a fortunate minority are given a home by their parents, for most a decision has to be made; whether to spend money to buy, or whether to rent. This essay will first look at the principal advantages of buying, and then at the main advantages of renting.
Martinez and Al-Fadel (1998:43) suggest that there are perhaps three principal reasons why people choose to buy. Firstly, many feel that there is greater personal freedom associated with buying a home. For example, the owner is free to redecorate as he or she wishes, without any fear of angering a landlord (and hence possibly losing the deposit paid on entering the property). Likewise, there will be no restrictions (within reason) on the behaviour of children or on the keeping of pets.
A second advantage of buying is certainly the possibility of financial benefit. In many countries, governments try to give incentives for home-ownership through tax cuts (Mortgage Interest Relief at Source is an example of this, from the UK), and home ownership may bring with it enhanced credit ratings. However, the main financial benefit undoubtedly accrues at the time when a mortgage is paid off; the home in this case can be seen as an investment, one which will be of particular value on retirement.
A final advantage of buying rather than renting is perhaps the most nebulous, but arguably for many of the greatest importance; the psychological factor. Ownership of a house can give a sense of security, a feeling that, in volatile times, there is something â€˜concreteâ€™ (in both senses of the word) upon which to fall back in time of need. And, as a lesser manifestation of a psychological state, many would accept that feeling part of a geographical area is enhanced by the process of buying into it; as MacFee (1999:86) puts it, "the investment of oneâ€™s time and energies into creating social links runs parallel to â€˜investmentâ€™ in the more normally accepted financial sense."
Having looked at the advantages of buying a house, let us now examine the many and valid reasons why people choose to rent rather than buy. Firstly, there are without doubt personal freedoms which are enhanced by renting. Maintenance is predominantly the concern of the landlord rather than the tenant, and a considerable amount of stress can therefore be avoided by making the decision to rent (Brockway, 1989). Furthermore, as Bernstein et al point out (1987:78), a tenant benefits from greater mobility than someone who has chosen to buy (who will in turn probably need to find a buyer should he/she want to move to a new area).
There are also clear financial benefits. Firstly, it is the landlordâ€™s responsibility to pay for all major repairs to the house (a point linked to the freedom from maintenance worries mentioned above).
Secondly, although many buy as an investment, there is also the very real risk that a property will decrease in value over a period of years; Dunbar (1999:83) notes that many in the UK, during the economic recession of the early 1990â€™s, found that their houses were worth much less than they had paid for them, and that a considerable number of houses were re-possessed by the banks who had provided the mortgage. The decision to rent is one clear way of avoiding this very real danger. However, a final point, and probably the most fundamental, is made by Brockway (1989:113); renting requires very little capital investment. For those with limited access to money, or those who choose to spend their earnings in other areas (such as travel or entertainment), renting will be preferable to buying.
A final advantage of renting is linked to the amount of time an individual is willing to devote to his/her chosen dwelling. We have already mentioned the worries and cost that house-maintenance can incur. Looking after a house can also take up a considerable amount of time, particularly for older properties,
and many often prefer to spend this time in other, more pleasurable or profitable, ways.
This essay has attempted an overview of the relative advantages of buying and renting a property, looking at factors associated with personal freedoms, financial benefits, and psychological well-being. In conclusion, it seems that it is not really possible to generalise by saying that the poor choose to rent, while the well-off buy; in the UK, people tend to buy when they can, whereas in other countries, such as Germany, renting is a popular choice across all social classes. Nor is it possible to say which method is â€˜betterâ€™. Depending on the circumstances, as outlined in this essay, both renting and buying will continue to provide an effective means of ensuring that a â€˜houseâ€™ is also a â€˜homeâ€™.
Bernstein, O., Wilkins, W. and Morgan, P. (1987) â€˜Problems for the future?: an analysis of the London housing boomâ€™, Journal of Property 30/7: 71-83
Brockway, F. (1989) The housing market, London, Longton
Dunbar, E. (1999) A sellerâ€™s market?, Helensburgh, Freewave Press
MacFee, J. (1999) House trends, London, Kagan
Martinez, E. and Al-Fadel, M. (1998) â€˜Investment options in US housingâ€™, Business Quarterly 23/1:39-48
(this essay has been prepared as a model for study purposes only â€“ the references have been made up to show bibliographic and referencing conventions)Back to 'Compare and Contrast'